The Yugoslav dinar has ceased to be legal currency in the constituent republic of Montenegro, replaced this week by the German mark. The adoption of the mark as the republic's sole currency is aimed in part at helping to bring Montenegro out of the shadow of its bigger partner Serbia and moving it closer to the West. But correspondent Breffni O'Rourke reports the move may have risks for Montenegro's underdeveloped economy.

Prague, 14 November 2000 (RFE/RL) -- Montenegro, Serbia's sole remaining partner in the Yugoslav federation, took a significant step toward asserting its own identity this week. It abandoned the Yugoslav currency, the dinar, adopting instead the German mark as legal tender.

For a transitional period of more than a year, the German mark and the dinar have been circulating together in the Montenegrin republic. Now the mark stands alone, and is expected in turn to be replaced in January 2002 by the European Union's common currency, the euro. The mark is already a sub-unit of the euro.

The bold currency move appears to be as much a political statement as an economic step. It was conceived by Montenegro's pro-Western government while oppressive Yugoslav President Slobodan Milosevic was still in power in Belgrade.

In the last years of Milosevic's rule in Yugoslavia, reformists in Montenegro tried in many ways to distance themselves from his often disastrous policies. But they had to tread carefully so as not to provoke Belgrade into a crackdown involving possible military action. Moving to adopt a major European currency was one way for Montenegro to show its desire to disentangle itself peacefully from dominant Serbia and its woes.

Phillip Lane, an economist with Trinity College in Dublin, puts it this way:

"Which currency you use is a major part of national identity, and this is an example of Montenegro saying they are a European country, more than a member of the former Yugoslavia."

Lane notes an analogy with his own country, the Republic of Ireland, which adopted its own currency in 1979 on largely symbolic grounds. For centuries before, Ireland had been tied to the monetary system of its dominant neighbor and former ruler, Britain.

Montenegro's currency change has economic motives as well. It is designed to lessen the smaller republic's ties with Serbia's moribund economy, inflationary pressures, and lack of economic policy direction.

Lane says that -- given Montenegro's desire to break away from the dinar -- the adoption of a ready-made foreign currency, the mark/euro, arguably makes sense. That's because it allows Montenegrin officials to forget about formulating monetary policy and concentrate instead on establishing good market mechanisms and a sound fiscal system.

And Lane says Montenegro's action is part of a wider tendency:

"There is a global trend, really, for very small countries to adopt, at the very least, fixed exchange rates with major currencies. This is a step to moving towards actually using [one of the big] currencies [in circulation,] and it is something which economists think will happen in more and more countries over time."

For example, in Latin America, a number of states have pondered the idea of adopting the U.S. dollar as a means of stabilizing their economies, particularly in order to control inflation. Some, like Ecuador and Panama, have already gone ahead and done so.

However, there are risks for Montenegro and other small nations in pegging their monies to big foreign currencies, or wholly adopting them.

Brussels-based analyst John Wyles, who is an adviser to the European Policy Center, points out that when a country has no control over its own currency, it cannot -- among other things -- choose to devalue to make its exports more competitive.

Instead, it may need to drop domestic prices by reducing wages or shedding jobs -- in other words, a painful transition period. Wyles says:

"Price adjustments which may be necessary fall much more directly on employment and wages. In other words, if -- in order to be competitive -- with a new hard currency, as it were as the basis of your economy, you have got to be prepared to adjust wages and employment initially probably downwards, so it could bring more economic hardship."

But Wyles says he would be surprised if the Montenegrin government had not taken account any likely negative impacts before deciding to go ahead with its adoption of the mark.